Fiscal cliff, defense sequestration draws closer

Countdown continues as defense leaders wait to see if the Pentagon will be forced to absorb the $500 billion cut mandated under sequestration.

Capitol Hill is empty this day after Christmas, but the fiscal cliff and the question whether Congress will be able to come to an agreement still hangs over the city.

So much so that residents can’t even escape the fiscal dialogue when dropping into Starbucks. Baristas are writing “come together” on all cups in their Washington D.C. shops to inspire politicians and their staffs to look past their differences and settle on an agreement to avoid the budget cuts and tax increase the cliff would bring.

Pentagon officials and defense industry execs have paid close attention to any sign that a deal is being worked on since House Speaker John Boehner’s proposal blew up after he couldn’t formulate enough support among Republicans. Those same leaders have watched the president’s flight plans closely noting how he returned from his annual Hawaii holiday vacation early on Wednesday.

It still stands to be seen what sort of leadership the president will provide ahead of the January deadline. Plenty have speculated that both sides of Congress will welcome the fiscal cliff because it creates the additional tax revenue the Democrats have sought. And with that tax increase, it will allow the Republicans to agree to a proposal that will like offer a tax break to offset the expiration of the Bush-era tax cuts.

Outside the implications on the stock market of this game of economic chicken, plenty of defense leaders are waiting to see if this means the mandated defense sequestration cuts will remain once the agreements are signed. The Budget Control Act mandates a 10 percent cut, or about $500 billion, to planned defense spending over the next decade.

Defense analysts have speculated that the defense cuts will be dealt with in the forthcoming agreement if Congress allows the nation to go over the fiscal cliff. U.S. Sen. Carl Levin, chair of the Senate Armed Services Committee, suggested the Pentagon could absorb a $100 billion cut rather than the $500 billion. It’s unclear whether that plan is being discussed, but it has been floating within the national debate.

Work continues on the 2013 defense budget as the conferences completed and settled on spending debates between the House and Senate. However, those budgets could change should the nation plummet off the fiscal cliff. Services will have to make changes to absorb the forthcoming cuts.

Tax rates and entitlements cuts continue to dominate the debate. Defense cuts have, for the most part, been left on the sidelines and gained little attention. However, defense modernization and readiness accounts expect to take a substantial blow should the sequestration cuts remain. No service will be left out should the $500 billion cut remain no matter where each stands under the new defense strategy or Air Sea Battle.

U.S. Sen. Joe Lieberman said Sunday he expects the debate to go right up to the New Year’s deadline and admitted that he expected the deadline to pass without a deal. The same prognostications occurred with the run up to the 2011 debt ceiling as pressure mounted. An agreement was forged then, but this debate is different and plenty of questions remain.

Boehner is expected to return Thursday. Plenty of other Congressional power players remain in D.C. Levin was seen on Christmas Eve shopping for last minute presents at a farmer’s market on Capitol Hill. It might sound counter intuitive, but the less the Congressional power players speak in public, the more likely an agreement is being hashed out. Meanwhile, the countdown to the end of 2012 will hold even greater meaning to those in the military awaiting to see their future budget fate.